Contents

RMBS

Hedging changes a boon for MBS

FASB recently announced plans to finalise new accounting rules for financial instruments used for hedging (SCI 24 July). Within the securitisation industry, MBS are likely to be most affected by the move, with the changes largely acting as a supportive measure by potentially boosting liquidity in the sector.

In terms of how liquidity might be boosted, Wells Fargo structured product analysts suggest that the changes provide banks with an ability to "separate out the interest rate risk from the spread risk for hedge accounting purposes, hedge longer-dated fixed income instruments using shorter-dated fixed income instruments and also obtain simpler accounting treatment for MBS when hedging the prepayment risk."

Walter Schmidt, svp and manager in the mortgage strategies group at FTN Financial, agrees that the changes should be effective. "Overall, I think it's a net positive. In general, the proposals achieve what they set out to do by allowing banks more flexibility with hedging and which could, in turn, increase liquidity."

The main areas affected by the accounting changes relate to hedging specified components, hedging partial term, hedging prepayable assets and cashflow hedges. The Wells Fargo analysts comment that the changes could have a number of different effects, ranging from isolating the impact of interest rate movement to removing income statement volatility from cashflow hedges.

As a result, one outcome of the changes could be that it will become "prudent" for banks to hold MBS in the available for sale (AFS) account again. The analysts add, however, that "just because banks have more accounting flexibility in hedging duration risk does not mean that they necessarily want to hedge duration risk embedded in MBS or somehow they have unwanted duration risk that they would suddenly want to hedge."

Furthermore, they suggest that should banks move MBS to the AFS account, they may ultimately have to increase leverage to realise larger returns. Also, once the assets are in the AFS account, "any gains or losses due to changes in spread will affect regulatory capital."

There appear to be investor concerns too that banks could move bonds from the hold to maturity (HTM) account to the AFS account and sell undesirable pools, which might cause TBA deliverable to worsen. Nevertheless, the analysts note that a bank's decision to sell pools is not just determined by the quality of those pools relative to TBA because the carrying value of the security and the gain/loss they will realise if they sell the security are "bigger considerations".

While Schmidt concurs that the changes will likely have an overall positive impact on MBS, he suggests there could be a negative impact for some investors. "The one aspect that could be a negative is for buyers of GNMAs, purchased in order to meet LCR requirements, during an HTM holiday," he elaborates.

He continues: "Essentially, this could negatively impact GNMA valuations, due to the combination of the two things together - and GNMAs are more negatively convex and have more prepayment risk in a rally. There is a chance then that GNMA spreads could widen relative to Treasuries and could underperform conventionals."

However, Schmidt indicates that regulatory changes should remain more of a concern and that, as a result, these accounting changes haven't shaken confidence so far. He concludes: "This has also been in conversation for the last 2-3 weeks and mortgage spreads have continued to grind tighter, so it's nothing too worrying - otherwise the markets would have reacted. GNMAs also tend to lag a little, so we'll see if there is an impact later on."

RB

RMBS

RMBS reaping RPL benefits

Freddie Mac last week settled its largest SCRT deal to date. The RPL RMBS market is growing and investors are enthusiastic about its prospects.

Freddie Mac Seasoned Credit Risk Transfer Trust Series 2017-2 has issued approximately US$2bn in guaranteed senior certificates and US$421m in unguaranteed mezzanine and subordinate certificates. It is backed by 9,939 fixed- and step-rate modified seasoned loans and all of these loans have been performing for at least 12 months as of issuance.

The SCRT 2017-2 RMBS is Freddie Mac's third through the programme. It builds on the successes of Freddie Mac Seasoned Credit Risk Transfer Trust Series 2016-1 and Freddie Mac Seasoned Credit Risk Transfer Trust Series 2017-1, issued in December 2016 and May this year respectively (see SCI's primary issuance database), although it is comfortably larger than either of them.

"There is strong demand for these RPL securitisations. We have been very pleased with the investor demand and with the pricing for our SCRT deals so far," says a spokesperson for Freddie Mac.

The spokesperson adds: "Our SCRT programme started in December 2016 as a pilot and the decision to become programmatic issuers stemmed from our feedback from that. We have about US$57bn in RPLs on our books and we continue to innovate to find solutions that are good for taxpayers, good for the company and good for the market."

Fannie Mae is yet to follow Freddie Mac's lead and does not have its own equivalent of the SCRT programme, focusing instead on selling whole loans. There would likely be RMBS demand, however. Neil Aggarwal, portfolio manager and head of RMBS at Semper Capital Management, notes that a significant driver in Freddie Mac's SCRT programme becoming more established is the attractiveness of the credit profile it provides access to.

"Investors like the paper because RPLs have an interesting combination of borrower types: often heavily seasoned pre-crisis origination, have manageable repayments, and benefited from embedded home price improvement. There simply are not many options for investors to access this type of credit profile," says Aggarwal.

He observes that the SCRT paper broadly targets two different investor groups. "The senior secured and wrapped securities are aimed at the institutions that typically trade agency RMBS pools or spec pools and are already very familiar with agency paper," he says. "The subordinate debt attracts a different kind of investor, typically appealing to traditional non-agency credit investors."

Aggarwal believes that the GSEs have done "a great job" of creating private markets whereby investors can access post-crisis risk and improved performance of pre-crisis borrowers. He notes that both agency and non-agency RPL RMBS paper is both attractive and increasingly available.

"Residential mortgage loan payments have been made increasingly affordable as servicers have employed more active management with borrowers since the crisis, largely the result of loan modifications from active servicing and government instituted programmes such as HAMP. These modifications have brought many borrowers back from the brink of losing their homes and reperforming on their mortgage once again," he says.

Aggarwal continues: "Not only have banks shed a number of NPLs and RPLs for capital relief, but the GSEs have also been compelled to de-risk their balance sheets. The GSEs have taken multiple approaches to de-risk, including selling loan portfolios as well as issuing transactions to convey credit risks to the private markets."

A growing source of paper is seasoned deals from 2005 or earlier which have entered into an optional redemption period. In some cases those deals are being collapsed by the call rights owners, who are then able to either sell the RPLs or launch new securitisations.

"Over the last five or six years there has been a significant investment thesis behind acquiring the call rights for legacy securitisations. The logic is that as collateral reperforms and HPA improves then these loan pools will trade at aggressive levels in the secondary market, so hedge funds and others have been acquiring these call rights to collapse the legacy securitisations and access the whole loans," says Aggarwal.

He continues: "We have seen many legacy deals which have been collapsed where whole loans are being auctioned, but we are now seeing an increase in RPLs being resecuritised. This is a pretty deep market offering access to a type of credit that is not easily sourced, and is a market we are heavily focused on. The RPL RMBS space is growing and offers interesting credit and fundamental investment profiles."

The size of the opportunity is hard to accurately gauge. While GSE sales continue, the wild card stems from the size of the RPL RMBS market resulting from called deals, as growth in the market is at least partly reliant on the optional redemptions being exercised in the secondary market.

Fitch reports that RPL issuance has trended at around US$15bn annually for the last few years. However, over recent months the rating agency says more RPL RMBS deals have been including borrowers with more recent performance problems than pools issued in prior years.

The Freddie Mac spokesperson notes that the GSE has now issued US$3.2bn in SLST transactions and US$800m over the course of its first two SCRT deals. More deals are expected, but only when it is economical for Freddie Mac to do so.

The loans in Freddie Mac's third SCRT deal are serviced by Nationstar, while the lead manager and sole bookrunner was Credit Suisse. Citigroup and Wells Fargo were co-managers, while Loop Capital Markets was a selling group member. Freddie Mac has now sold US$7bn in NPLs and securitised US$31bn in RPLs, of which US$5bn are in structured offerings.

JL

ABS

Exeter breach an 'atypical' event

EART 2015-2 senior bondholders received no principal payment this month, after the auto ABS deal's cumulative net loss (CNL) trigger was cured. Although this appears to be an atypical event, it nevertheless highlights the importance of understanding structural characteristics in order to price risks more efficiently.

Weaker-than-expected credit performance led to a failure of EART 2015-2's CNL trigger in February. Wells Fargo structured products analysts note that senior bondholders had therefore been receiving excess cashflow to reduce leverage and increase overcollateralisation to higher targeted levels. The CNL trigger - which is not continuous, but tested every third month - subsequently passed its test this month.

The curing of the CNL trigger resulted in the OC target level dropping from 17.75% to its original level of 12.75%. In order to return the OC target amount to its original value, principal cashflow was directed back to the equity holder to reduce the dollar amount and percentage of OC, according to the Wells Fargo analysts.

"As a result, senior bondholders received no principal payment in the August 2017 distribution period. OC had been building due to the previously failed trigger and a principal payment to the senior bondholders would not have reduced the OC amount," they explain.

They add: "We believe the senior bondholders in EART 2015-2 are likely to experience just one month of principal window extension from the curing of the trigger because the tranche is close to paying off and OC never reached its higher targeted level."

Other EART transactions are structured with triggers that are measured in a similar way to those found in EART 2015-2. EART 2015-3, for example, is currently failing its CNL trigger and - depending on the CNL seasoning path - principal cashflow interruption may be experienced from triggers toggling in that deal as well. However, the analysts point out that EART 2016 vintage deals have so far avoided breaching their triggers.

"An interruption of principal cashflow allocation to senior bonds in auto ABS due to a curable trigger seems to be an atypical event, in our view," they conclude. "It may have been unexpected by some market participants. However, it highlights the importance of understanding the underlying structural characteristics of ABS deals to price risks more efficiently."

CS

ABS

Air Berlin insolvency affects aircraft ABS

Air Berlin filed for insolvency yesterday. While intervention from the German state should keep the airline operational for at least the next three months, there are a dozen aircraft ABS deals exposed to Air Berlin and temporary cashflow disruptions are anticipated.

Air Berlin's insolvency filing follows the refusal of Etihad to provide further financial support to the airline. Etihad is Air Berlin's largest shareholder and has also previously pulled support from Alitalia (SCI 4 May), which experienced similar difficulties.

"Air Berlin's business has deteriorated at an unprecedented pace, preventing it from overcoming its significant challenges and from implementing alternative strategic solutions," says Etihad. The company provided €250m to Air Berlin as recently as April.

The German government has provided a €150m lifeline to Air Berlin, which should keep the airline operational for three months. The money will be repaid from the proceeds of asset sales.

German economy minister Brigitte Zypries says that a deal where Lufthansa takes over part of the airline should occur over the next few months. Lufthansa operates 40 aircraft for two of Air Berlin's subsidiaries.

"There is no transfer of Air Berlin as a whole to Lufthansa, there are parts of the business that will go to Lufthansa, and there are interested parties for other bits of the business," adds transport minister Alexander Dobrindt.

Air Berlin has a fleet of 72 planes, with nearly the entire fleet leased. Wells Fargo analysts find 12 post-crisis aircraft ABS deals that have at least one aircraft on lease to Air Berlin or an Air Berlin subsidiary.

The largest estimated exposure, by current market value, to Air Berlin is 7.4% for SHNTN 2015-1. There is also a 7.3% exposure for EAFL 2013-1.

Other affected deals are: CLAST 2015-1 (6% exposure); RISE 2014-1 (5.7%); SJETS 2017-1 (5.6%); AASET 2016-2 (5.3%); HAIL 2016-1 (5.1%); ECAF 2015-1A (4.2%); LAFL 2016-1 (3.7%); DCAL 2015-1A (2.9%); AASET 2014-1 (2.8%); and CLAST 2016-1 (2.1%).

"We believe that should Air Berlin ultimately be liquidated, deals could see temporary cashflow disruptions as aircraft are repossessed, repaired and re-leased by the lessors," says Wells Fargo. The analysts note that aircraft with larger operator bases, lower storage rates and economical operation are more likely to be re-leased sooner.

"Per the latest data, all but one of the aircraft on lease to Air Berlin (within current ABS deals) are narrowbodies. As data from third-party sources may not be fully updated, we encourage investors to check current deal documents," they say.

JL

Structured Finance

SCI Start the Week - 14 August

A look at the major activity in structured finance over the past seven days.

Pipeline
Additions to the pipeline last week were balanced between ABS and CMBS. There were five of each, as well as three RMBS and a CRE CLO.

The ABS were: US$1.1bn Ally Auto Receivables Trust 2017-4; US$223m Flagship Credit Auto Trust 2017-3; US$888.7m GMF Floorplan Owner Revolving Trust Series 2017-2; US$1.382bn Nissan Auto Receivables 2017-B Owner Trust; and US$335m Prestige Auto Receivables Trust 2017-1.

US$1.07bn CAS Series 2017-C06, JPMMT 2017-3 and US$355.4m Sequoia Mortgage Trust 2017-6 accounted for the RMBS. The CRE CLO was US$314.4m Bancorp 2017-CRE2.

The CMBS were: US$350m BXP Trust 2017-CC; US$941.58m Citigroup Commercial Mortgage Trust 2017-B1; US$1.1bn GSMS 2017-GS7; US$477.8m MSSG Trust 2017-237P; and US$708.6m UBS 2017-C3.

Pricings
Issuance was concentrated on ABS. There were eight ABS prints and a further three RMBS.

The ABS were: CNY3.67bn Bavarian Sky China 2017-2; US$1.3bn Discover Card Master Trust 2017-6; US$442.78m DT Auto Owner Trust 2017-3; US$525m Golden Credit Card Trust Series 2017-4; US$907m Hyundai Auto Receivables Trust 2017-B; US$350m MVW Owner Trust 2017-1; CNY2.52bn VINZ 2017-2 Retail Auto Loan Securitization Trust; and US$400m World Financial Network Credit Card Master Note Trust Series 2017-B.

The RMBS were: US$2.47bn Freddie Mac SCRT Series 2017-2; US$1.296bn Towd Point 2017-4; and US$495m Tricon American Homes 2017-SFR1.

Editor's picks
Refi SLABS seeing product, borrower expansion: Refinanced student loan ABS (SLABS) has grown to become a defined sector within student lending, making up a third of total US SLABS volume. With this growth, lenders are expanding across a range of measures - including loan and borrower type - and new competitors continue to enter the space...
Best execution requirements assessed: MiFID 2, due to be implemented across the EU by 3 January 2018, will have a far-reaching impact on the continent's financial markets, not least ABS. While the new rules will reshape banks' relationships with their customers in many ways, two of the most pressing are the unbundling of research and proving best execution...
Highly concentrated Trups CDOs see mezz recovery: Trups CDOs remain an attractive source of capital for community bank issuers, but ratings are increasingly reliant on the largest obligors. Trups deals are expected to largely remain outstanding until legal maturity, with redemptions driven by idiosyncratic factors specific to issuers...
Subprime auto subs hit record tights: US subprime auto ABS are pricing at the tightest spreads on record in the face of strong investor demand. The trend is occurring across the capital structure, most recently exemplified by Westlake Automobile Receivables Trust 2017-2, the subordinate tranches of which last week printed at the tightest levels ever for the sector...

Deal news
• Bancorp Bank is marketing a US$314.4m static commercial real estate CLO, backed by 24 floating-rate commercial mortgage loans secured by 31 properties. The transaction, dubbed Bancorp 2017-CRE 2, is structured as a REMIC trust and features several innovations, including not permitting a ramp-up or the acquisition/reinvestment of assets post-closing. The sponsor is also expected to sell the risk retention-compliant first-loss position to a third party.
• Fannie Mae has priced its first GeMS REMIC backed exclusively by green MBS collateral. The issuance is the first of its kind in the market and builds on the GSE's previous US$1bn FNA 2017-M2 transaction, which was backed by 30 loans originated under the Fannie Mae green financing business and securitised as green DUS MBS (SCI 16 February).
• The IBRD has priced a series of catastrophe bonds that will provide the Mexican Fund for Natural Disasters (FONDEN) with innovative parametric coverage of up to US$360m. The ILS were issued across three tranches with exposure to three types of disasters - earthquakes (CAR 113 notes), Atlantic tropical cyclones (CAR 114) and Pacific tropical cyclones (CAR 115).
• Solidum Re has launched what is believed to be the first-ever catastrophe bond to have been digitised on a private blockchain. Named the ILSBlockchain, this mechanism has replaced the role of a traditional settlement system for the note issuance.

Regulatory update
• The US SEC's division of economic and risk analysis (DERA) has published a report assessing how trends in primary securities issuance and secondary market liquidity relate to post-crisis regulatory reforms, in line with a Congress request under the 2016 appropriations process. The analysis - which spans 2005-2016 - shows that overall ABS (excluding RMBS) issuance has recovered since the trough of 2010, with the volume of private offerings being slightly larger than the volume of registered ones following the financial crisis, a reversal from the pre-crisis period.

Capital Relief Trades

Risk transfer framework outlined

Outlines of the main elements of the EBA's risk transfer discussion paper - due to be released next month - have been revealed. The recommendations will focus on the main structural features of risk transfer transactions and may at a later stage result in regulatory changes. It remains unclear whether the consultation will result in final technical advice, however.

The paper comes after a three-year gap from the publication of the EBA's significant risk transfer (SRT) guidelines, which have provided some harmonisation. However, divergence remains at the national level in terms of assessing certain structural features of risk transfer deals.

"The goal is to standardise risk transfer transactions and make them more transparent," says one source close to the drafting of the paper. "The aim is to ensure that SRT has truly happened, especially with synthetics, which don't have permanent funding and that is because you don't sell any receivables."

Two of the structural features that will be examined in the paper include the amortisation structure and excess spread. Regarding the first, sources state that pro-rata amortisation is problematic for supervisors, since it may deplete protection for the senior tranches.

"The EBA is looking at additional measures to further protect transactions when pro-rata is being used," observes another source.

Excess spread also suffers from a lack of harmonisation at the European level. The EBA intends to remain open to the use of excess spread, but under strict conditions.

These include ensuring that excess spread is taken into account within the relevant significant risk transfer tests, which is not necessarily the case with the current SRT framework. Other conditions could take the form of a cap on the amount of excess spread and stipulations over the way it is used in a transaction.

The EBA is also examining other aspects, including: what happens to the CDS in the case of a bank default; when a transaction can be called; and standardising the definition of commensurate risk transfer.

SP

CLOs

CLO yen repacks prepped

Three CLOs are being repackaged to issue the senior notes in Japanese yen, rather than US dollars, as the market prepares for the first repacks of resets. Repackaged CLO Series KK-2 will issue ¥25.172bn, Repackaged CLO Series KK-3 will issue ¥29.37bn and Repackaged CLO Series KK-4 will issue ¥27.72bn.

The ¥25.172bn A notes of Repackaged CLO Series KK-2 have been formed by repackaging US$227.6m of the US$272.2m class A1A notes to be issued by Marathon X CLO, effectively converting them into Japanese yen-denominated securities from US dollar-denominated securities. The new notes have been rated triple-A by Moody's and S&P.

The ¥29.37bn A notes of Repackaged CLO Series KK-3 have been formed by repacking US$267m of the US$346m class AR notes to be issued by Venture XIV CLO, again effectively converting them into Japanese yen-denominated securities from US dollar-denominated securities. These new notes have also been rated triple-A by Moody's and S&P.

The ¥27.72bn A notes of Repackaged CLO Series KK-4 have been formed by repacking the US$252m class AR notes to be issued by KKR CLO 10, once more effectively converting them into Japanese yen-denominated securities from US dollar-denominated securities. As with the other two repacks, the new notes have been rated triple-A by Moody's and S&P.

The arranger for all three repacks is Mitsubishi UFJ Morgan Stanley Securities (MUMSS). MUMSS is also serving as cross-currency swap counterparty for all three CLOs.

The cross-currency swap helps to mitigate the risk posed by the fact that the principal and interest on the underlying securities will be payable in US dollars while amounts owed to investors in the repack notes will be payable in Japanese yen. If unhedged, the repack notes would be exposed to foreign exchange risk.

The expected closing date of Repackaged CLO Series KK-2 is 14 September. The expected closing dates for Repackaged CLO Series KK-3 and Repackaged CLO Series KK-4 are 29 August and 19 September respectively.

JL

CMBS

'Cross-over' dispute highlighted

The trustee for the MLCFC 2007-8 CMBS has withheld US$143.7m in principal, according to August remittance data, as the transaction parties seek to determine the payment order. Trepp suggests that the dispute pertains to how principal payments in 'cross-over periods' should be handled.

The trustee website this month indicates that there is a language dispute between the PSA and the offering circular. The notice states that an investor requested that Section 4.01 of the PSA be retroactively amended to eliminate an inconsistency between the PSA and the prospectus supplement concerning how certain amounts deposited in the distribution account should be distributed on each distribution date. The investor also requested that the trustee hold funds affected by the requested amendment uninvested in a trust account, pending a resolution of this issue.

In most late CMBS 1.0 deals, the securitisation included a tranche dedicated to multifamily loan principal (usually the A1A class), which is devoted entirely to paying off that class. Trepp notes that the structures typically dictate that if the multifamily loans are liquidated with losses or are slower to repay their respective bonds, principal from the remaining loans must be used to pay off the A1A class once the A classes for the regular bonds have been retired, as well as prior to paying the AM class.

The multifamily group for MLCFC 2007-8 is broken into A1A, AMA and AJA classes, and the regular group of bonds is split into A, AM and AJ classes. "With the regular A bonds having been retired last month, the question is: should the remaining principal from the regular group be crossed over to pay off the A1A this (or the following) month, or should it first be used to pay the AM, then the AJ, before crossing over to pay off the A1A?" Trepp asks.

The firm says that under its model, the class A1A notes are paid off first before the AM classes. Trepp's modelling for MLCFC 2007-8 this month includes a reserve account in the amount of US$143.7m, which will be flushed out to the A1A class in the September payment. If the investor prevails, it will alter its model, perhaps forcing that money to the AM and AJ classes.

CS

NPLs

Chinese NPL collections surveyed

Collections for most Chinese non-performing loan securitisations have outpaced originators' initial projections, as of June 2017, according to a Moody's analysis of trustee report data. The study suggests that while originators of unsecured consumer NPL deals are the most optimistic about collections, the expense ratio for these transactions is the highest.

For the purposes of the analysis, Moody's classified 15 Chinese NPL deals (out of 20 currently outstanding) for which reporting data is available into four categories based on collateral type - corporate NPLs (accounting for seven deals), unsecured consumer NPLs (four), retail mortgage NPLs (three) and micro-enterprise NPLs (one). The agency excluded micro-enterprise NPLs from the analysis, as there is only one deal that has issued a trustee report in this segment.

Of the three main loan types, the analysis shows that retail mortgage NPL deals have the highest actual collections when compared to initial projections, at 324.16%. In comparison, unsecured consumer and corporate NPL deals posted 143.77% and 160.88% respectively.

Meanwhile, unsecured consumer NPL deals have the highest revised collections projection over their full lives (at 101.75%), compared with the initial projections. Corporate and retail mortgage NPL deals posted revised projections of 94.46% and 82.90% respectively, according to the trustee data.

Moody's indicates that the total anticipated collections for the majority of the deals can still more than cover the total original note issuance amount of both the senior and junior notes. "In other words, the amount of reduced collections in the revised projections are fully covered by the initial overcollateralisation in the asset pools in all these transactions, except one deal. That means that the recovery coverage is still above one for most transactions and there are still sufficient expected 'transaction life overcollateralisation'," it explains.

Among the 15 transactions for which data is available, the Moody's analysis shows that there were only two cases where during one period there was a shortfall of NPL collections and interest from eligible investments, compared to total transaction expenses and note interest and principal payments. In one of these cases, the senior note principal was fully repaid in the first period and the reserve fund was reduced to zero. In the other case, the originator used the reserve fund to cover an amount of collection shortfalls in the previous collection period.

The analysis also shows that the cost of making collections and servicing the NPL pool as a percentage of the money collected from the NPL pool is the highest in the unsecured consumer NPL deal category (at 11.43%), largely due to the high average number of borrowers, low average loan balance and geographic diversity. In comparison, the expense ratio for the corporate and retail mortgage NPL categories stands at 5.09% and 1.25% respectively.

Resolving unsecured consumer NPL loans involves operating through debt collection agencies, which Moody's suggests may be more costly, due to the frequency of communication with the borrower and the wide geographic dispersion. This compares with the resolution of secured NPL loans, whereby liquidation of assets is the main source of recovery expense and may be more straightforward.

Unsecured consumer NPL deals have the highest weighted average number of obligors (at 90,691) and the lowest average loan amount (at RMB57,290). This compares with 151 average obligor number and the highest average loan amount for corporate loan deals, at RMB8.57m. In unsecured consumer NPL deals, the highest geographic exposure is typically lower than 15%, whereas for corporate loan NPL deals it can range from 20%-47%.

Despite higher collections confidence from originators, unsecured consumer NPL securitisations have been priced at a steeper discount than deals backed by the other NPL categories, reflecting the typically lower expected overall recovery rate. Unsecured consumer NPL deals have the lowest weighted average senior note advance rate to pool principal and interests of 9.4%, while retail mortgage loan deals have the highest at 40.35%.

The weighted average remaining term of the senior notes for unsecured consumer NPL ABS is approximately 9.6 months, whereas for secured transactions it is 31.4 months.

CS

RMBS

Streamlined refi programmes near

The US FHFA has extended HARP through to the end of 2018 and announced that the new GSE streamlined refinance programme for high LTV borrowers will be effective from 1 October. Given that the eligibility criteria considerably limit the population that can take advantage of the new programme, it appears to be geared towards having an efficient refinancing construct in place, should there be another housing downturn.

"On the face of it, the streamlined underwriting would make the refi programme quite aggressive, but only for those eligible to use it. In this context, the current (mark-to-market) LTV of 95% for single-unit primary residences implies that the expected borrower base at this point is quite small and the programme is more proactive than reactive," note structured products analysts at Wells Fargo.

The streamlined refinance programme is designed to provide liquidity for borrowers that are current on their mortgage, but are unable to refinance because their loans have LTV ratios that exceed the GSEs' maximum limits. The FHFA says that the October eligibility date was necessary to preserve the objectives of the GSEs' credit risk transfer programmes, which will be modified to accommodate the streamlined refinance programme by allowing the newly refinanced loans to return to the reference pools in place of loans that prepaid. The aim is to help preserve credit loss protection on the loans without unwinding the protection paid for through CRT transactions.

Fannie's streamlined refinance programme is named High LTV Refinance Option, while Freddie's is named Enhanced Relief Refinance (ERR). To help investors analyse and model for ERR in CRT reference pools, Freddie Mac has published historical HARP loan level data disclosures as a proxy.

For a borrower to qualify for the new programmes, at least 15 months must have passed from the note date of their current mortgage. The borrower must be current on their payments and cannot have any 30-day delinquencies in the most recent six months and no more than one 30-day delinquency in the past 12 months.

The LTV thresholds are aligned at 95% for single-unit primary residences for both GSEs and the mortgages should not have gone through HARP. There are also thresholds for single-unit second homes (90%) and single-unit investor properties (75%).

Unlike HARP, borrowers can use the programme more than once, providing the other criteria are met. Refinancings won't begin until 2019, given the seasoning requirement, while CRT reference pools won't include streamline-eligible loans until mid-2018.

The Wells Fargo analysts note that when the preliminary details of the streamlined refinance programme were released in August 2016, no eligibility date was specified. They suggest that investors in the CRT HLTV groups would have stood to benefit from that version of the refinancing programme, as the reference collateral would have been able to fluidly refinance if there was another housing downturn.

Now, however, the eligibility date of 1 October effectively precludes existing HLTV groups in CRT deals from accessing the programme. "From an investor's perspective, while the eligibility criteria added in this iteration of the refinancing programme makes it less beneficial than the preliminary version, it could still be credit-positive for future transactions, as the newly refinanced loan will likely be on better terms," the analysts add.

Morgan Stanley RMBS strategists expect the new programme to worsen the negative convexity of the agency RMBS market moving forward. "Fast-forwarding to 2019, if rates rally and we have negative HPA, models will need to be calibrated for streamlined refinancing options. We can't quantify the impact of this until we know the details about what this programme offers the borrower, but it's tail risk that investors should think about," they observe.

Meanwhile, the Morgan Stanley strategists suggest that the HARP extension is negative for super-premium coupons and HARP-eligible derivatives - although they note that it's unclear how much investors have priced this in already. They add that when the FHFA last extended HARP by nine months, derivatives widened by about a quarter of a point, albeit models suggested it was worth about half a point.

The extension keeps expectations of any decline in HARP-related prepayment speeds on seasoned premiums at bay, according to the Wells Fargo analysts. "However, the larger question in that same vein is whether or not we see a rebound in HARP speeds, given the pullback in higher coupon speeds. This will give us a read on whether or not the potential expiration of HARP was driving prints lower, rather than other factors," they conclude.

CS

RMBS

Self-cert extension risk eyed

The self-certified mortgage loan ban included in a recent amendment to European legislation (SCI 27 July) could lead to extension risk for securitisation investors, according to DBRS. The rating agency also suggests that the sale and price of distressed or reperforming mortgage portfolios could be negatively affected, which would in turn be detrimental to issuance volumes.

In a recent commentary, DBRS raises questions over the availability of data and whether self-certified loans are necessarily of higher risk than other types of mortgages. While self-certified mortgages have a higher credit risk than income-verified mortgages, it is only by a margin of 19%, according to the analysis. Comparatively, borrowers with county court judgements (CCJs) have average risk scores 292% higher than those without CCJs, and those classed as non-conforming with previous forbearance yield a risk score 329% higher than borrowers without proper forbearance.

These factors all suggest that the risk of self-certified loans does not justify the level of regulatory concern and DBRS indicates that when analysing loans classified as 'non-verified/fast-track' or 'other', delinquencies decline to be closer on average to those classified as 'verified'. Self-certified loans do, however, display defaulted balances at 2%, while defaulted income-verified loans are at 0.02%.

The self-cert amendment could mostly be felt by those looking to securitise legacy mortgage portfolios, with the UK suffering the greatest impact because it contains a relatively large number of such assets in securitisations. Equally, the regulation effects owners of NPLs that are looking to securitise, because the market price of self-certified mortgage portfolios could fall, particularly with the removal of securitisation as a funding strategy. The number of firms able to purchase these portfolios may also then be limited.

DBRS suggests that finding sufficient income verification data can be a challenge for owners of self-certified pools looking to securitise and that originators do not always know whether their loans were verified. Similarly, RMBS investors may not therefore always be able to assess if the securitised mortgages were self-certified or if the borrowers were aware of income verification, making a judgement about potential extensions more difficult.

The rating agency analysed 800,000 UK mortgages and found the majority (61.99%) were income verified, while the rest are split between non-verified/fast-track loans (30.13%), self-certified loans (0.12%) and others that have no data (7.76%). It suggests that the most difficult situation for investors is when the data is not available because it will be challenging to state to the regulator that the income the borrower provided was being verified.

Maturity extention risk is also more likely after the regulatory amendment because outstanding RMBS transactions with exposure to self-certified mortgages will be affected when the step-up dates are reached and the structures become more expensive. Securitisation is typically a common option for firms to refinance mortgage portfolios when the call date is reached, but this could be limited by concentrations of self-certified mortgages.

DBRS comments that self-cert mortgages could go through an additional underwriting process to become income-verified, although this may not be economically plausible and there is opacity about whether additional income verification will be permitted by the regulation. If securitisation isn't utilised, the loans could be sold as whole loan portfolios or financed by covered bond transactions, if originated by a bank. The lack of refinancing possibilities is of particular concern for investors in transactions undertaken by non-bank lenders, which don't have the option of moving the loans to balance sheet, according to the agency.

RB

Structured Finance

Job swaps round-up - 18 August

North America

Redwood Trust has appointed Dashiell Robinson to the newly formed position of evp, overseeing the firm's financial and portfolio investment functions, as well as working with its ceo Marty Hughes and president Chris Abate in advancing its long-term business strategies. Robinson will begin at the firm in October, reporting to Abate, having previously served as head of mortgage finance within Wells Fargo's asset-backed finance group. Redwood has also promoted Collin Cochrane from controller and md to cfo, reporting to Robinson.

Greystone has added two mds to the CMBS lending group, Joe Mosley and Dan Wolins. Both will report to Rob Russell, head of CMBS loan production. Mosley will be based in Greystone's Birmingham, Alabama office, and joins from UBS, where he was a director originating CMBS loans. Wolins will be based in the New York office and joins the firm from Hunt Mortgage Group, where he was md.

Allen & Overy has hired Lawrence Berkovich as a partner in the firm's securitisation and structured finance practice in New York. Berkovich has 15 years of CLO and structured finance experience and joins from Ashurst with a team of four associates.

Angelo Gordon has hired Brian Haklisch as md in the firm's investor relations team focusing on North America, based in New York. Previously, he was md of marketing and investor relations at Structured Portfolio Management.

JLT Re has hired Nicolas Bardon as partner at the firm's Bermuda office, reporting to Guy Hengesbaugh. He was previously at Somerset Holdings, where he led business development and production since 2013.

Allyson Kaufman has joined Medley Management as an md in its institutional fundraising group, based in San Francisco. Kaufman will cover institutional investors for Medley's private funds and separately managed accounts, having previously been a founding member and md at Corrum Capital Management, where she led investor relations, business development and distribution strategies. Prior to that, she was a vp at Oak Hill and a vp, senior product manager/client portfolio manager at Goldman Sachs Asset Management.

James Wolf has joined Houlihan Lokey's financial advisory services tax and financial reporting valuation practice as an md, based in New York. Prior to joining the firm, he spent nearly 30 years at EY, where he held a number of roles, including serving as a market leader for its valuation and business modelling group and a managing partner for its centre for strategic transactions.